‘That said’ – began our flirtation with CN in this space, August 13, 1998 – ‘I do have a stock you might want to look into-Calton Homes (American Stock Exchange symbol CN)-understanding that I own a lot of it, purchased years ago, and that it really could fall five-eighths of a point. That doesn’t sound like much of a drop, especially for an American Stock Exchange-traded stock, but in this case, at least as of my writing, it would bring the price to zero. Zero, I need hardly mention, is a price at which it is hard to feel flush no matter how many shares you own; a decline from which, no matter how adroit the court-appointed receiver, it is hard to recover. Zero is not good.’
I went on to make the pitch anyway, and we got lucky. From five-eighths it jumped about tenfold – ‘The Lunatics Take Over – Yippee!’ I titled my February 11, 2000, column – by which time we had sold all or most of it.
A few months later, it collapsed with the rest of the market and again found itself selling for little more than half the cash it had in the bank. So on July 24, 2000, I suggested it might again be worth a nibble. You were buying $1.50 or so in cash for .85 cents, and getting a few little Internet speculations thrown in. (The company had sold its homebuilding business and changed its name to e-Calton.)
Because of a five-for-one ‘reverse split,’ the share price by then was actually around $4.25 and the cash-per-share about $7.
Last week, someone announced a takeover bid at $5.50 a share. If it happens, no one gets rich – a jump from $4.25 to $5.50 a share is hardly a five- or ten-fold gain like the first time around. But it’s still 29% in under a year, which in the old days used to be considered pretty good.
Will Alford, MD: ‘Equilink is trying to buy Calton for $5.50, when the CASH value is more than $7!’
☞ Yes, they are.
Hank Gillette: ‘I’d about decided that your Calton tip wasn’t that great. Of course, I’ve only held my shares since last August, so I guess I was being impatient. Now I have to decide whether to sell or wait for further developments.’
☞ Well, it’s no sure thing, but I would hold on.
THE DOWNSIDE: It’s certainly possible this deal, like any other, will fall through, and the stock will fall back down. If the company management fritters away much or all of the $7.50 or so a share in cash it now has in the bank, you would feel like an idiot for not having cashed in at today’s price. (The stock traded briefly at $5.50, I think, but then fell back to $5.22, $5.10, and $4.80 as I look at it now.) One way the cash could be drained is in the possible battle to take over the company – lawyers and proxy fights are expensive, and it doesn’t take very long to blow through millions of dollars.
THE UPSIDE: But what are the advantages of waiting? First, if you do get $5.50 three months from now, say, instead of $4.80 or even $5.30, that’s not a bad return on three month’s work. Second, if the buy-out occurs, but not until August, you might have held long enough to get the more favorable long-term capital gain treatment (not relevant if you bought inside a retirement plan). Third, someone might decide that $7.50 in cash plus an American Stock Exchange listing makes the perfect ‘corporate shell,’ worth paying a little more than $5.50 for. (Not that I expect this tiny little company to be the subject of any serious attention – some houses cost more than this entire company.) Fourth, rather than getting taken over at $5.50, the management – which owns about a third of the stock themselves – might just decide to liquidate the company and give all the shareholders, themselves included, more like $7 a share in cash.
Clearly, Calton is not going to make you rich. But I can think of worse gambles than hanging on to see what happens.
Quote of the Day
That I'm their competition.~Famed hedge fund manager Michael Steinhardt, when asked the most important thing an investor could learn from him.
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